The Industrial Commission of Arizona issued new guidance clarifying how it intends to enforce many provisions of Proposition 206, otherwise known as the Fair Wages and Healthy Families Act. As stated in our prior Legal Alert, the Act requires that employers provide all Arizona employees with paid sick time starting July 1, 2017. The Industrial Commission’s guidance, along with its earlier proposed regulations, answers many of the questions raised by the new paid sick time law. In this article, we highlight some of the most compelling paid sick time questions that the Industrial Commission has answered.

Question 1: If an employer’s selected “year” ends less than 365 days after the Act’s earned paid sick time effective date (July 1, 2017), can that employer prorate its employees’ annual earned paid sick time accrual and usage caps based on the number of days remaining in the employer’s “year”?

In the absence of statutory and judicial guidance on the issue, the Industrial Commission will permit an employer whose selected “year” ends less than 365 days after the Act’s earned paid sick time effective date (July 1, 2017) to prorate employees’ annual earned paid sick time accrual and usage caps based on the number of days remaining in the employer’s “year.” Prorated accrual and usage caps should be rounded up to the nearest hourly increment or the smallest increment that the employer’s payroll system uses to account for absences or use of other time, whichever is smaller. An employee’s accrual rate, however, may not be prorated.

Example: Employer A’s selected “year” runs from January 1 through December 31. The employer will have 184 days remaining between the Act’s earned paid sick time effective date (July 1, 2017) and the end of the employer’s selected “year.” Employer A may prorate the amount of earned paid sick time that its employees are entitled to accrue and use during the partial year at a rate of .504 (184/365 = .504). Assuming that Employer A has 15 or more employees and the smallest increment that the employer’s payroll system uses is one-tenth of an hour, employees of Employer A would be entitled to accrue and use at least 20.2 hours of earned paid sick time (.504 x 40 hours, rounded up to nearest tenth of an hour) in the 184 days following July 1, 2017 (the remainder of the employer’s “year”).

Question 2: Is an employer with employees outside of Arizona required to include those employees when calculating its total employees for earned paid sick time purposes?

The Act’s minimum wage and earned paid sick time provisions apply only to Arizona employees. Therefore, in the absence of further statutory or judicial guidance on the issue, the Industrial Commission will not include an employer’s non-Arizona employees in an employer’s total employee count for earned paid sick time purposes.

Example: Employer A has 10 California employees, three Colorado employees, and four Arizona employees. Though Employer A has 17 employees across three states, it has just four employees for earned paid sick time purposes. Because Employer A has fewer than 15 employees in Arizona, its four Arizona employees are entitled to accrue and use at least 24 hours of earned paid sick time per year (whereas an employee of an employer with 15 or more employees in Arizona would be entitled to accrue and use at least 40 hours of earned paid sick time per year).

Note: This departs from previous guidance which required employers to include out of state employees.

Question 3: Are earned paid sick time accrual and usage caps prorated for partial-year employees? In other words, is an employee who works part of a year entitled to accrue and use the same amount of leave available to a year-round employee?

The Act does not draw a distinction between year-round and partial-year employees. An employee’s accrual and usage caps are based solely on the size of the employer and are not based upon whether an employee works a full or partial year.

Question 4: How does an employer determine hourly wage rate for earned paid sick time purposes?

In the absence of statutory and judicial guidance, the Industrial Commission is proposing rules consistent with the following methods for determining hourly wage rate:

• For employees with a single hourly rate. For employees paid on the basis of a single hourly rate, an employer is required to pay the employee the same hourly rate that the employee would have earned for the period of time in which sick time is used. For example, if an employee’s hourly rate is $15 per hour, the employer is required to pay the employee $15 for each hour of earned paid sick time.
• For employees with multiple hourly rates. If known, an employer is required to pay a multi-rate employee the actual hourly wages that the employee would have been paid for the period of time in which sick time is used. If unknown, an employer must pay an hourly rate equivalent to the weighted average of all hourly rates of pay during the previous pay period
• For salaried employees. Employers must pay a salaried employee an hourly rate equal to the employee’s total wages earned during the pay period covered by the salary divided by the number of hours agreed to be worked in the pay period for which the salary is intended to compensate. If a salaried employee’s hours of work vary from work week to work week, for the purpose of calculating the same hourly rate to be used for the payment of earned paid sick time, the employee is presumed to work 40 hours per workweek.
• For commissioned, piece-rate, or fee-for-service employees. Such employees’ hourly rates are determined in the following order of priority:
  1. The hourly rate of pay agreed upon by the employer and the employee, if an hourly rate of pay was previously established.
  2. The wages that the employee would have been paid, if known, for the period of time in which earned paid sick time is used.
  3. A reasonable estimation of the wages that the employee would have been paid for the period of time in which the earned paid sick time is used.
  4. The weighted average of all hourly rates of pay during the previous 90 days, if the employee worked regularly during the previous 90-day period.

Note: Shift differentials and premiums meant to compensate an employee for work performed under differing conditions (such as hazard pay or a shift differential for working at night) shall be included when computing an employee’s hourly rate. Additionally, overtime, holiday pay, bonuses, other types of incentive pay, tips, and gifts do not need to be included in an hourly wage rate determination. Pursuant to the Act, in no case may an employer pay less than minimum wage per hour of earned paid sick time.

Question 5: Must an employer carry forward balances of earned paid sick time at the end of a year to the next year?

The Act provides that earned paid sick time shall be carried over to the following year, subject to usage limitations based on employer size. Alternatively, in lieu of carry over, an employer may pay an employee for unused earned paid sick time pursuant to A.R.S. § 23-372(D)(4). Absent statutory or judicial guidance, the Industrial Commission is proposing rules consistent with the following:

An employee of an employer with 15 or more employees may carry over to the following year a maximum of 40 hours of unused earned paid sick time. An employee of an employer with fewer than 15 employees may carry over to the following year a maximum of 24 hours of unused earned paid sick time. Carry over shall not affect accrual or use rights under the Act.

Example: Employer with 15 or more employees. Employee A accrues 40 hours of earned paid sick time in Year 1 and does not use any of the accrued time. The proposed rule would allow Employee A to carry forward the 40 hours of accrued but unused earned paid sick time to Year 2 (unless the employer exercises its buy back option pursuant to A.R.S. § 23-372(D)(4)). Assuming the employer did not buy back hours pursuant to A.R.S. § 23-372(D)(4), Employee A remains entitled to accrue another 40 hours of earned paid sick time in Year 2 (for a maximum of 80 hours). If, at the end of Year 2, Employee A has 80 hours of unused earned paid sick time and the employer does not exercise its buyback option pursuant to A.R.S. § 23-372(D)(4), Employee A may only carry forward 40 hours of earned paid sick time into Year 3 (though they may accrue another 40 hours in the course of Year 3). NOTE: Employee A may only use 40 hours of earned paid sick time in any given year.

Note: the Industrial Commission has proposed codifying this interpretation in R-20-5-1206(F).

Question 6: When an employer’s paid leave policy either meets or exceeds the Act’s requirements, and an employee uses accrued leave for reasons unrelated to earned paid sick time (such as vacation), is the employer required to provide the employee additional leave for earned paid sick time purposes?

No. The Act provides that “an employer with a paid leave policy . . . who makes available an amount of paid leave sufficient to meet the accrual requirements of this section that may be used for the same purposes and under the same conditions as earned paid sick time under this article is not required to provide additional paid sick time.” A.R.S. § 23-372(E). Therefore, provided that an employer’s equivalent paid leave policy provides paid leave that may be used for the same purposes and under the same conditions enumerated in the Act, it need not offer additional leave when an employee utilizes the available time for purposes other than those enumerated in the Act. _____________
Notes:

See Industrial Commission of Arizona, Frequently Asked Questions (FAQs) About Minimum Wage and Earned Paid Sick Time, available at https://www.azica.gov/frequently-asked-questions-about-wage-and-earned-paid-sick-time-laws

On May 5, 2017, the Industrial Commission published its proposed regulations for Prop. 206 in the Arizona Administrative Register. o 23 A.A.R. 1047, available at http://apps.azsos.gov/public_services/register/2017/18/04_proposed.pdf.